Covance (CVD) Sellout Decision to LabCorp: A Strategic Fit?
On Nov 18, we issued an updated research report on Covance Inc. (CVD).
The company reported an unimpressive third quarter of 2014, with earnings meeting the Zacks Consensus Estimate and revenues lagging the same. Moreover, in a separate announcement, Covance declared that it has entered into a definitive agreement with Laboratory Corp. of America Holdings (LH), under which LabCorp will acquire the company for a total equity value of $6.1 billion.
Management at Covance strongly believes that its impending acquisition by LabCorp will provide significant benefits and value for all Covance stakeholders. Post closure of the acquisition (expected by the first quarter of 2015), the company’s shareholders will receive $75.76 in cash and 0.2686 LabCorp shares for each Covance share they own. They will thus own approximately 15.5% of the combined company.
According to Covance, this combination will foster improved healthcare and reduced cost, thus enabling clients to better substantiate the value of their products and services to patients and payers. On joining hands, the increased cash flow of the new company will allow management to make an increased investment in innovation. It is expected that combined revenue growth from a broader platform, increased scale, synergies, and strategic deployment of cash flow will create significant long-term shareholder value, going forward.
During the quarter under review, Late-Stage Development continues to grow steadily for Covance. Despite lower revenues in Phase II-IV clinical development services, the segment witnessed growth on the back of better-than-estimated kit volumes in central laboratories as well as the May 2014 acquisition of Medaxial.
Over the past few quarters, Covance had been suffering from sluggish early-stage R&D spending by the biopharmaceutical industry which resulted in overcapacity in this segment. However, of late, the company is showing signs of recovery with improvement in Early Development performance on the back of robust growth in clinical pharmacology and a substantial increase in toxicology orders despite a decline in discovery support and the impact of the sale of the Seattle genomics laboratory.
However, we are concerned about the 5-year portion of the 10-year Sanofi (SNY)-Covance alliance which is about to expire in Nov 2015. In addition, capital spending environment and the competitive landscape remain tough.
The stock currently carries a Zacks Rank #3 (Hold).
Key Picks from the Sector
Medical service stocks such as Quintiles Transnational Holdings Inc. (Q) are also expected to do well. This stock holds a Zacks Rank #2 (Buy).
Read the Full Research Report on SNY
Read the Full Research Report on CVD
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Read the Full Research Report on LH
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